Small business access to finance

Question 1

Ministerial foreword

Accepted Answer

Growth is the number one mission of this government. With the industrial strategy to be published in June and the small business strategy to be published later in 2025, we are determined to improve the support government facilitates and help the nation’s 5.5 million small businesses thrive. Government is working on providing the tools that every small and medium-sized enterprise (SME) needs to start, thrive and grow.  

External finance, particularly for small businesses, is important for:

supporting business investment
ensuring businesses reach their growth potential
helping new business to start

Significant strides have been made in diversifying the market and improving small business access to finance through a range of measures. At the same time, both finance providers and small businesses have highlighted barriers in providing and accessing debt finance.

We are seeking your views and evidence to help us:

assess how far our existing policies meet the needs of business and the lending sector in overcoming barriers to finance
understand where we may be able to go further to create growth through our support for SMEs and the lending sector

We need the input of market participants to shape our understanding of the evidence on the main barriers to access to finance.

We are looking for the experiences of:

small businesses
bank and non-bank lenders
industry experts

We are grateful for any time you can give to answering the questions. Your insights will be invaluable in helping us to create the right pro-business environment for the UK economy to grow. Whether you have data, ideas, challenges, opportunities, or priorities to share with us, this is an opportunity for you to contribute.

We look forward to hearing from you.

Gareth Thomas MP and Emma Reynolds MP

Question 2

Context

Accepted Answer

This call for evidence seeks views, evidence and experiences of applying for and accessing debt finance in the UK.

It covers all aspects of:

the lending market
the demand for finance
the application and approval process
alternative models of finance
under-served customers

Equity finance is not included within the scope of this call for evidence given ongoing policy developments, including the:

creation of the National Wealth Fund
launch of the British Growth Partnership
Pensions Investment Review

The access to finance landscape for small businesses in the UK is relatively well understood, researched and evidenced. Through this call for evidence, we will set out and seek views on our interpretation of this evidence and our understanding of the debt finance landscape.

The evidence suggests that understanding and addressing the reasons for low levels of demand for borrowing is as important for increasing the take up of external finance by UK small businesses as considering the factors that influence the supply of finance.

By asking these questions and seeking views directly, we therefore aim to better understand some of the more complex dynamics between supply and demand.

In particular:

why demand for debt finance is lower than our international counterparts and particularly low for certain demographics
whether government can build on existing steps to support businesses in accessing the finance they need – in turn increasing economic growth

Question 3

Terminology

Accepted Answer

In this call for evidence, we use the term ‘small businesses’ and SMEs, interchangeably, to include micro, small and medium-sized enterprises. Any organisation that has fewer than 250 employees is defined as an SME.

Table: defining an SME

Number of employees	Business size
Between 50 and 249	Medium
Between 10 and 49	Small
9 and under	Micro

Question 4

How to respond

Accepted Answer

If you are responding on behalf of a small business, please specify the size of the business (number of employees), location and sector. This could include one of the following sectors:

real estate
retail and wholesale
manufacturing
finance and insurance
professional and technical
health and social care
construction
education
IT and communications
business admin and support
public sector and defence
transport and storage
accommodation and food
utilities
arts and recreation
mining and extractives
agriculture, forestry and fishing
other

The call for evidence will close on 22 May 2025.

To respond, email accesstofinance@businessandtrade.gov.uk.

Please refer to the questions provided in this document to guide your response.

Please specify the question number(s) to which you are responding in your email to us.

Question 5

Why small business finance is important

Accepted Answer

Small businesses are crucial to the UK economy, as they:

generate a significant portion of our gross domestic product (GDP)
create significant employment
support local communities
encourage innovation
promote diversity by providing a range of goods and services across different regions

Accessing the right finance is one of the main areas that many small businesses say is important to their success. ^{[footnote 1]}

Securing external finance for small businesses is crucial for:

supporting business investment
ensuring businesses reach their growth potential
enabling new business start-ups

We believe that the right type of finance, at the right time in a business’ journey and taken for the right reasons can encourage growth, and we want to make sure that the conditions are appropriate for this to happen.

Ease of access to finance is an important element of a pro-business environment. It helps businesses to employ people and make investments, which is central to the government’s growth mission. However, where small businesses encounter barriers in accessing the finance they need to start-up, scale-up and grow, this can limit their contribution to business investment and UK economic performance.

The government offers a range of support for small businesses to thrive and grow. Help accessing the right level and type of finance part of this.

Small businesses can currently get support from organisations such as:

the British Business Bank
Growth Hubs
Help to Grow: Management
Innovate UK

Other organisations also provide support for small businesses. The Department of Business and Trade (DBT) works across government and with the private sector to ensure the needs of small businesses are met.

The British Business Bank is the UK government’s economic development bank. Established in November 2014, its mission is to drive sustainable growth and prosperity across the UK and to enable the transition to a net zero economy, by improving access to finance for smaller businesses. Its remit is to design, deliver and efficiently manage UK-wide smaller business access to finance programmes for the UK government.

Question 6

Small business lending: progress and success

Accepted Answer

After the global financial crisis, UK lending markets were highly concentrated, with around 90% of SME lending provided by the 4 largest banks. ^{[footnote 2]}

Improvements in technology and strong support from government and the authorities to encourage more competition in banking have collectively helped to increase the number of new lenders in the UK.

In addition, the establishment of the British Business Bank, and with it, programmes such as the ENABLE programmes and the Investment Programme, have helped broaden the UK’s financing base.

Non-traditional lenders, also known as challenger banks, now provide the majority of SME lending. As of 2024 challenger banks account for 60% of annual gross bank lending to SMEs. ^{[footnote 3]}

The debt finance market for small businesses has become more diverse in the last decade and is more evenly spread across the UK as debt finance provision is highly digitalised.

Since 2014, 36 new banking licences have been issued to SME lenders, of which a third have been supported by one of the British Business Bank’s programmes. Increased competition has brought significant benefits in reducing reliance on and concentration of a small number of lenders. Finance markets have therefore become more resilient. Especially when compared to the period after the global financial crisis, where tight lending conditions slowed down the economic recovery. This would help the UK in a future crisis, which was demonstrated to some extent during the COVID-19 pandemic. UK finance markets were able to support and sustain the real economy during the periods of lockdown.

Asset finance has been particularly effective at supporting investment in physical assets such as plant, machinery and IT equipment. New business grew by 3% overall in 2024 to reach a record level of £39.7 billion, of which lending to SMEs accounted for £23.5 billion. ^{[footnote 4]} The Finance and Leasing Association estimates that asset finance, which includes leasing and hire purchase, accounted for one-third of all UK investment in vehicles, machinery, and equipment in 2024. ^{[footnote 5]} This form of finance will play an important role in supporting small businesses to make the transition to a low-carbon economy.

Marketplace lending and platform lending business models have developed rapidly to become a large part of the lending market. By 2019, these lenders contributed £2.75 billion of business lending and £1.35 billion of commercial property lending. ^{[footnote 6]}

Alternative finance providers have greatly increased their share of lending to smaller businesses.

Alternative finance providers include providers of:

asset finance
invoice finance
term loans
cashflow loans
venture debt
private debt

This has been achieved by:

attracting businesses traditionally served by high street banks
offering services to viable businesses that were previously unable to access funding at all

Most alternative finance providers, with a few exceptions, do not compete with the traditional banks but complement their offerings.

As such, they have not only increased the options available to smaller businesses but have also increased the accessibility and appropriateness of finance available.

For example, private debt funds have become an increasingly important source of finance for smaller businesses that are seeking to grow quickly. Lenders have also gained significant shares in asset finance and invoice finance and asset-based lending (IF/ABL) markets. ^{[footnote 7]} The Finance and Leasing Association estimate that 37% of new SME asset finance was supplied by non-bank lenders in 2023 with challenger and specialist banks also increasing their share in recent years. ^{[footnote 8]}

However, the despite the increase in finance providers for small businesses the take-up rate of business loans remains subdued.

Additionally, there has been limited competitive downward pressure on loan prices overall because challenger banks must pay more for wholesale funding compared to the largest banks. Larger banks’ costs are reduced by their access to customer deposits. As a result, we have not benefited fully from competition in the lending market in the way that may have been expected.

British Business Bank

British Business Bank debt market interventions seek to address finance supply gaps across a range of SME debt finance markets.

These government debt finance programmes play a crucial role in supporting SMEs. Over the last decade, the Bank’s debt and guarantee programmes have helped 206,000 SMEs to access £20.7 billion in finance, ^{[footnote 9]} which go some way towards addressing the gap.

Specific British Business Bank debt finance interventions include the following:

Start Up Loans – personal loans for business purposes of up to £25,000 and free mentoring to new entrepreneurs who would not typically qualify for loans from commercial lenders. Business Support Partners support delivery of the scheme on a national scale, on cross-cutting themes including women and ethnic minorities, and in specific regions. Specialist partners deliver bespoke services to specific market segments, such as X-Forces Enterprise for ex-armed forces applicants.

Nations and Regions Investment Funds – debt and equity funding for businesses across 3 English regions, as well as Scotland, Wales and Northern Ireland, offering a range of commercial finance options to encourage sustainable economic growth by supporting innovation and creating local opportunity for new and growing businesses

Growth Guarantee Scheme – unlocks lending for small businesses that would otherwise be unable to access the finance they need, or would only be able to do so on worse terms

ENABLE Guarantee – increases the availability of finance for small businesses by facilitating additional lending capacity for finance providers, and boosts competition and diversity in the small business finance market by supporting the growth of newer providers

ENABLE Build – works in the same way as the ENABLE Guarantee but concentrates specifically on increasing the availability of finance for smaller housebuilders

ENABLE Funding – increases funding diversification for, and reduces constraints on, smaller finance providers – increasing the supply of debt for small businesses

Investment Programme – fully commercial investment into alternative lenders and challengers.

Evaluations of British Business Bank schemes point to positive effects

Evaluation of Start Up Loans (SUL) found that businesses established by SUL borrowers had higher survival rates than comparator businesses. SUL borrowers demonstrated between 4% and 26% higher survival rates than comparators. Also, larger loans were associated with higher turnover growth and higher likelihood of business survival.

Econometric analysis indicated that SUL beneficiaries’ businesses had experienced stronger growth since incorporation than comparator businesses, in terms of assets and employment. ^{[footnote 10]}

Most of the finance extended under the Recovery Loan Scheme (RLS) 1.0 – the predecessor to the Growth Guarantee Scheme – would not have been provided without the scheme. It is estimated that 83% of loans were economically ‘additional’.

RLS 1.0 had a positive influence on borrowers’ turnover, with analysis estimating that borrowers had 17% higher turnover than they would have had without the scheme.

Borrowers also reported that the scheme was important for their survival, with 12% of surviving RLS 1.0 borrowers reporting that they definitely would have ceased trading and a further 47% saying they would have been very or fairly likely to have ceased trading. ^{[footnote 11]}

The evaluation of the Northern Powerhouse Investment Fund (NPIF) showed that over the first 3 years of NPIF, 475 businesses had been supported generating 2,661 jobs by end of the 2020 to 2021 financial year.

The programme has performed well in terms of finance additionality with nearly half of survey respondents saying they would not have got finance at all without NPIF (full additionality) and nearly one-third would not have accessed finance as quickly or to the same scale, or both (partial additionality). ^{[footnote 12]}

Work is underway to implement a set of reforms to the British Business Bank’s financial framework by putting the Bank’s commercial programmes on a permanent footing. Making the capital base of the Bank’s commercial programmes permanent will allow the Bank to re-invest its commercial returns over the long-term, catalysing more capital into UK companies. It will also allow the Bank to deploy its capital in a more flexible way using its full range of capabilities to support the government’s missions and the delivery of its industrial strategy.

Digital innovation and open banking

The debt finance market for small businesses has become more diverse in the last decade and is more evenly spread across the UK as debt finance provision is highly digitalised.

These developments in finance markets and the wider business ecosystem have contributed to supporting the rise in the SME business population from 5.25 million businesses in 2014 to a peak of 6 million at the beginning of 2020. ^{[footnote 13]}

The World Bank reports that digitisation has become an essential enabler to closing the financing gap for small businesses. ^{[footnote 14]} Digital financial services can support access to alternative sources of funding and improve access to traditional lenders through new digital products and process automation.

The UK has also pioneered Open Banking and established itself as a leader in the field.

Open Banking provides third-party financial service providers access to a customer’s current account data, with the customer’s consent. This data can be used to improve the credit risk-assessment process by providing real-time information about a customer’s finances, allowing small businesses that may have previously been unable to obtain finance to do so.

‘Open Finance’ would expand Open Banking’s data sharing principles into other financial services sectors, further improving the information available for credit risk-assessment. In the National Payments Vision, ^{[footnote 15]} published in November, the government set out its ambition for the UK to be a world leader in Open Finance.

Question 7

Demand for debt finance

Accepted Answer

Recent economic context

Small businesses are the beating heart of our high streets and communities and are essential to our economic success. For some of these small businesses, access to debt finance could support them to achieve a step change and encourage wider economic growth.

Our evidence base, which we set out in this call for evidence, along with observation of international counterparts, suggests that there may be areas where performance could be improved, such as for groups that are particularly affected by access to finance barriers.

We are seeking your input to understand what would need to change to help those businesses with the potential to grow to access the right finance for them at the right time and overcome the barriers we have identified.

Like most other developed economies, the UK has faced a period of high economic uncertainty.

Much of this has been a result of unprecedented global shocks such as:

the fallout from the financial crisis
the economic contraction and supply chain disruption from the COVID-19 pandemic
the energy price spike following Russia’s invasion of Ukraine, contributing to a rise in inflation and interest rates

The last decade has been challenging for the UK’s 5.6 million small businesses as their demand for external finance is both directly and indirectly influenced by global macroeconomic conditions.

The steep increase in interest rates and tighter lending conditions globally has directly affected the cost and access to finance for UK SMEs, which rely on debt to finance operations and investments. Whilst less directly, uncertainty about the economic environment is also a reason for under investment, with 36% of businesses surveyed reporting that as the main reason. ^{[footnote 16]}

The evidence suggests that understanding and addressing the reasons for low levels of demand for borrowing is as important, or arguably more important, for increasing the take up of external finance by UK small businesses than just considering the supply of finance. UK SME demand for finance, as shown by the application of new or renewed funding, is 3.5% and just 1.5% for bank loans. ^{[footnote 17]} This compares to the Euro area where just under 20% of SMEs applied for a bank loan from Q2 to Q3 2024. ^{[footnote 18]}

Even with an improvement in supply such that approval rates doubled to over 90%, (in line with pre-global financial crisis approval rates) this would only produce a relatively small improvement in adoption of external finance, moving the proportion of UK SMEs who both apply and receive finance up from the current 1% to 2%. ^{[footnote 19]}

We seek to better understand and address demand for borrowing more effectively through the questions in this call for evidence.

UK trends: debt finance

Debt finance markets play an important role in supporting businesses to invest and grow. The UK has amongst the lowest level of borrowing by non-financial businesses as a percentage of GDP compared to other G7 countries. ^{[footnote 20]} This is particularly pronounced for UK SMEs.

This is partly an issue of demand with 86% of SMEs having no desire to borrow. ^{[footnote 21]} However, there are some constraints on the ability of businesses who do wish to borrow in accessing the external finance that they need.

Overall loan success rates for firms applying for bank finance are low in the UK, at less than 50% on average. This is down from an approval rate of 67% in Q1 2018 to Q2 2019 before the pandemic. ^{[footnote 22]} There will be a number of reasons why small businesses are rejected but there is a question as to whether these rejection rates are too high and why this may be the case.

Most high street lending currently goes to low-risk, larger and long-established firms where margins are lower due to competitive pressure. Within the average, existing borrowers and applicants for leasing or hire purchase products enjoy higher success rates of around 80% ^{[footnote 23]} as the lender has legal ownership of the collateral.

Lower success rates are experienced by:

first-time applicants
loan applicants
those applying to their main bank

It is difficult to determine the reasons for this, but it could be the case that:

businesses may be applying for the wrong finance or making errors in their application
providers may be struggling to properly assess applications with the available information
there may be more prudence post-pandemic with higher rates and increased insolvencies
these may be predominantly temporal or structural factors

Although 46% of SMEs were using external finance in Q4 2024, ^{[footnote 24]} underlying core business finance usage levels by SMEs are currently low. ^{[footnote 25]}

The 46% figure includes:

credit cards – 16%
overdrafts – 11%
regular loans – 9%

Credit cards are not designed as a business finance product and for many are a payment mechanism.

Some overdrafts are designed as a business finance product but are now provided at high-interest rates ^{[footnote 26]} and therefore are not a sustainable source of borrowing for most firms.

Despite the benefits that external finance can bring to small businesses, and improvements made to the diversity and supply of finance, there appear to still be several reasons why the demand for external finance is low.

These include:

some small businesses not wanting to seek finance
discouragement
the perception of debt finance among small businesses
borrowing costs
financial awareness and management approaches
risk aversion
the specific experiences of under-served groups in the market

Use of finance

Some small businesses rely on internal and personal funds as a source of finance rather than seek external finance – particularly for investment purposes. For example, over 50% of businesses that invest exclusively use internal funds as finance. ^{[footnote 27]}

Small businesses can also be discouraged from applying if they have been deterred by previous rejections or have had poor experiences during the application process. Only 34% of SMEs who are planning to apply for new or renewed finance are confident their bank will agree to the facility, down from 56% in 2019. ^{[footnote 28]}

In addition, there is a perception among Chief Financial Officers at UK companies that bank loans are too expensive, and the cost of finance can be particularly impactful for firms with pre-existing debt. ^{[footnote 29]}

Risk aversion

Many businesses feel that they invest too little into their business. For example, 24% of businesses feel that they have invested too little, with the percentage being larger for smaller businesses. ^{[footnote 30]} Also, 60% of businesses are not going ahead with investment due to prioritising building up cash reserves. ^{[footnote 31]}

If increasing cash buffers were a lower priority for small businesses, it is possible that more investment opportunities would be pursued.

Over a third of SMEs both: ^{[footnote 32]}

want to be a bigger business
are willing to take risks in order to be successful

Despite this, only 3.5% of SMEs apply for new or renewed external finance. ^{[footnote 33]} This suggests that even businesses who believe they are willing to take risks to grow their business are averse to borrowing and the use of external finance.

Financial awareness and management approach

Small businesses consistently say that they find the business support landscape fragmented and complex, with only 26% of UK SME employers reporting in 2023 to have sought external advice or information in the last year. ^{[footnote 34]}

A lack of awareness and understanding of finance options and products suited to their specific needs, and how to best use them, could contribute to low levels of demand for external finance. Digital adoption and management skills could be some of the factors influencing demand, and interventions in this area could help more businesses access the finance they need to grow.

The realities of running a business can affect the demand for finance and outcomes, such as management time availability or needing to wait until contracts for products or services are secured before being confident to seek finance.

Small businesses typically: ^{[footnote 35]}

do not shop around, preferring to go to their main bank for a loan
do not leave much time between applying for finance and their deadline for funding

It is unclear whether these time constraints or financial awareness is the main barrier.

Short-term approaches to investment decision-making can also affect borrowing appetite and outcomes, resulting from attitudes towards both finance and investment.

Existing government programmes seek to support businesses improve their management capabilities and understanding of finance options.

Examples include:

British Business Bank Finance Hub – provides independent and impartial information on different finance options for scale-up, high growth, and potential high growth businesses, as well as resources that support SMEs to innovate and become more sustainable
Help to Grow: Management programme – open to firms with between 5 and 249 employees, helps SME leaders develop skills in financial management, innovation, and growth plan implementation to improve productivity
Business Support Service (BSS) (formerly the Business Support Helpline) – a free, virtual, multi-channel advice and guidance service, operating across England

These form an important element of the UK government’s business support provision, working on behalf of DBT.

In 2023 alone, the BSS supported nearly 25,000 businesses through its range of services. While the ‘Help to Grow: Management’ programme has supported over 9,000 small businesses since 2021. ^{[footnote 36]}

In addition to government programmes, other high-quality and impartial sources of support and information are provided by the private sector.

When navigating their credit options, small businesses typically turn to a known provider in the first instance.

Brokers can also assist small businesses in navigating access to credit and are an important intermediary in smaller business finance markets, particularly for commercial property and asset finance transactions. Through their industry knowledge and expertise, they try to match a borrower’s requirements with the most appropriate lender operating in the market.

Smaller businesses that have either been unsuccessful in finding the funding they require when approaching a lender directly or who do not have the time or financial confidence can instead tap into the expertise of the broker. ^{[footnote 37]} Commercial finance brokers facilitated £38 billion in lending to SMEs in 2023. ^{[footnote 38]}

In December 2024 the Secretary of State for Business and Trade also announced a new Business Growth Service (BGS) which will, over time, make it easier and quicker for businesses across the UK to get the help, support and advice they need to grow and thrive.

A national service with local delivery at its heart, the BGS will bring together a range of existing core services as well as new and improved elements of the business support offer that will be delivered both centrally and locally. We will work with local and devolved governments and the Growth Hubs network, building on the commitments in the devolution white paper and aligning with the UK-wide small business strategy that is currently under development and due to be published later this year.

The government has also published the second post-implementation reviews on the Commercial Credit Data Sharing (CCDS) scheme and the Bank Referral Scheme (BRS) and intends to launch consultations on how it can further enhance them in spring 2025.

Questions for businesses

1. What is your experience of seeking debt finance? Please specify the type of debt finance you are referring to.

Why did you choose to seek debt finance (for example for investment, cashflow or other reasons)?
Do you typically look to your existing bank for credit, or do you approach a variety of lenders for finance in the first instance? And if rejected, do you approach other providers of finance?
What channels do you use when seeking finance (for example digital applications, third party platforms, brokers)?

2. What has your experience been of using a commercial finance broker?

3. How could the Business Growth Service best encourage business finance readiness, including signposting and facilitating access to appropriate financing options at the right time?

Questions for general response

4. Do you believe that there are any barriers to demand for debt finance? If so, what are the main barriers?

5. Do you believe that financial education or knowledge and availability of information are barriers to demand? If so, to what extent?

In your view, how can these barriers best be addressed?
Are there examples of support and advice frameworks in other jurisdictions you believe could benefit the UK?

6. Why are some small businesses permanent non-borrowers?

Should this be considered a problem?
How can policy intervention support small businesses in this category, who have ambitions to grow, to seek finance?

Other developments in accessing finance

Although there have been significant developments in the small business lending space, both in relation to the evolution of the lending sector and introduction of different forms of government support, there is scope to make further progress in ensuring businesses can access the finance they need to thrive and grow. In particular, there are questions about the adequacy of attractive credit provision.

This section sets out our understanding and existing evidence on:

personal guarantees
lending against intangible assets
regulation

Personal guarantees

Personal guarantees enable a business to take out a loan, usually without any business assets as security, with the owner or director being personally liable for repaying the loan if the business defaults on loan repayments. Commercial banks consider that such a guarantee is required to enable lending that would otherwise not be available without business collateral, which may preclude many small businesses from taking out a loan.

There may be a misconception in the market regarding the potential effect and risks of taking on a personal guarantee which some businesses cite as a barrier to demand for borrowing, as very few personal guarantees are called upon and are typically used as a last resort. One of the potentially more challenging issues where personal guarantees are called upon relates to the lifecycle of a personal guarantee attaching to the individual and the fact that they may forget about this until instances such as after a company sale or retiring from a business.

The Lending Standards Board (LSB) Standards of Lending Practice for business customers are industry standards recognised by the Financial Conduct Authority (FCA). They apply to lending outside of the FCA’s regulatory perimeter. In September 2024, the LSB announced changes to their guidance effective from 8 September 2025, which set an expectation that firms should contact personal guarantors on a regular basis to confirm the information held about the guarantor and provide a reminder that the guarantee remains current.

In October 2024, UK Finance published a set of commitments made by a number of its Commercial Finance members, seeking to:

provide confidence that the industry maintains a proportionate approach to using personal guarantees
ensure that individuals are made fully aware of the significance and implications of agreeing to a personal guarantee
ensure that individuals are treated fairly and appropriately when they agree to provide a personal guarantee

In addition, following a super complaint on personal guarantees, the FCA published its response in December 2024. ^{[footnote 39]} Among other things, this encouraged firms both within and outside its remit for business lending to look at their post-contractual communications with customers taking out loans backed by a personal guarantee. ^{[footnote 40]}

Lending implications for intangible assets

In 2022, UK businesses invested a record £200 billion into intangible assets (such as software, branding, and R&D). ^{[footnote 41]} Intellectual property (IP) rights provide a means to control, protect, and extract value from investment into intangibles. Research suggests over half of the investment into intangible assets receives some form of IP protection. ^{[footnote 42]}

In the past, government has heard that banks can find it difficult to value and lend against IP assets. ^{[footnote 43]} Banks prefer tangible assets, such as a building, as loan collateral. This position can make borrowing more difficult and costly for some IP-rich smaller businesses, especially those lacking a sufficient pool of tangible assets. In 2018, government estimated the annual financing gap to be between £68 million and £354 million for IP-backed growth loans. ^{[footnote 44]}

SME financing markets seen growth in private equity and non-bank lenders which target IP-rich companies. Some banks have started to introduce new loan products that more actively consider IP value in lending decisions, using IP as part of their security package. This is common amongst software and biopharma companies who may not have a physical asset, but are able to monetise their product.

Regulation

Financial regulation can support economic growth through:

measures to increase trust and confidence in markets and market institutions
ensuring market stability
improved competition and consumer protection

The FCA have noted that while there is extensive research on the barriers to accessing suitable finance there is little on how to effectively address barriers through improved regulation. ^{[footnote 45]}

It has been argued that many firms, particularly SMEs, have had difficulty accessing finance from traditional lenders, such as large banks, which may have become more risk averse. ^{[footnote 46]}

In 2013, the Financial Services Authority (FSA) and the Bank of England set out regulatory changes to reduce the barriers to entry and expansion in the banking sector and enable increased competitive challenge to existing banks. These have made it easier for new banks to be authorised and brought innovation to the sector, particularly where there are gaps in the market.

Regulatory changes have also supported the development of open banking. ^{[footnote 47]} In the UK, 750,000 small to medium-sized enterprises are using innovative open banking enabled products and services to manage their money and to make payments. ^{[footnote 48]}

In recent years, increased regulatory protections have been afforded to support small businesses. A major development that should increase trust is allowing small businesses greater access to Financial Ombudsman Service (FOS), which provides an independent dispute resolution service for individuals and small businesses. More than 99% of UK businesses currently have access to independent dispute resolution through the FOS, without prejudice to the ability to pursue litigation as a means of redress. ^{[footnote 49]} The 2019 reforms were a significant expansion on the previous dispute regime, which only applied to microbusinesses.

At the Autumn Budget 2024, the government published the second post-implementation reviews on Commercial Credit Data Sharing (CCDS) and the Bank Referral Scheme (BRS), setting out its intention to launch consultations on how it can further enhance them in spring 2025. ^{[footnote 50]}

Both policies are designed to help improve SME access to finance and competition in the SME lending market, by helping to lower market barriers for newer and smaller finance providers. CCDS ensures that all finance providers can access the SME credit data they need to accurately assess risk, while the BRS connects SMEs rejected for finance by the largest high street banks, with a wider range of finance providers.

When these policies were first introduced 10 years ago, the largest 4 banks accounted for over 80% of UK SME main banking relationships. However, since then, the SME market has successfully diversified and the government is now seeking to enhance these policies keep pace with market and technological changes and ensure they remain effective for the future.

Questions for businesses

7. What factors do you consider when selecting finance provider(s)?

8. Are there sources of support or advice, or both, that you use to access finance? To what extent do these meet your needs?

Questions for general response

9. In your view, what would help to encourage the volume of small business lending in the UK?

10. Do you have experience or knowledge of successful lending market interventions in other jurisdictions that have helped meet an identified debt market gap?

11. What role do personal guarantees (PGs) play when seeking debt finance? Specifically, we would welcome the following evidence:

data (over a period of at least 12 months and no more than 36 months) on:
(i) the nature and/or size of lending for which a PG is required
(ii) the typical borrower characteristics where a PG is required
(iii) the proportion of lending to limited companies where a PG is used
data (over a period of at least 12 months and no more than 36 months) on the extent to which the requirement for a PG has prevented an SME taking up credit when it has been offered to them (and the relative importance to other factors, such as overall loan cost)
evidence on the role PGs play in credit provision, including the extent to which the requirement for a PG has enabled access to credit by SMEs
evidence of the extent to which issues relating to the calling of PGs have been experienced, what these were and where in the lifecycle of the loan these have arisen – please specify when this occurred

12. In your experience, what are the barriers to borrowing to finance intangible investments relative to tangible investments?

13. What is the experience of businesses seeking to use intangible assets as collateral for borrowing?

14. Do you believe that regulatory change has affected business lending? If so, how?

Question 8

Alternative lending and business models

Accepted Answer

The UK corporate lending market provides a multitude of lending products that target different segments of companies, and many of these initiatives are better developed than in other European countries. They range from debt products offered by mainstream lenders and alternative finance platforms to various types of invoice, supply chain and asset finance.

The UK also has a well-established private debt market developed by US fund managers looking to European markets post-global financial crisis, although SME-focused debt funds are still under-provided in the market.

The UK has a small developing Community Development Financial Institution (CDFI) sector, but is the one of the few advanced economies without a developed cooperative or regional mutual banking sector.

Approaches in other jurisdictions

Many other advanced economies have relationship-based systems of lending to SMEs that are profit-making but not profit-maximising. ^{[footnote 51]} Because relationship-based banking models allow lenders to consider more than just a company’s financial credentials, they are typically able to serve a greater proportion of businesses seeking finance.

Alternative banking models can include:

cooperative banks, which are dominant particularly in Europe
local, non-profit-making, Community Development Financial Institutions (CDFIs) which are prevalent in the US, there are some CDFIs in the UK, but they are very small, accounting for less than £1 billion of lending in a typical year
local, state-backed banking systems, unique to certain countries, such as Germany’s savings banks (Sparkassen)

Such alternative banking models are in addition to, and complement, shareholder banks. The attributes of successful local or regional alternative banking models include:

alternatives to the shareholder model of ownership – such as cooperative or member ownership, or in the case of Sparkassen a form of pseudo-ownership (Trägerschaft) that can never be sold or transferred
a mission to support local economic growth, including on a countercyclical basis during economic downturns
a defined geography – banks are either required or encouraged to invest in their local area
lending decisions based on a broader assessment of a firm’s prospects than solely financial criteria – for example by considering management capability
a wraparound business support in addition to financial products, as part of a long-term relationship between business and bank

Whereas commercial banks will typically apply strict lending criteria based on a company’s financial data, cooperative and mutual banks can consider other factors only apparent due to the relationship-based approach to lending. This means that although cooperative and mutual bank loans are typically more expensive, partly because of the increased cost of this relationship-based model of lending but also because they use price to manage demand for their products, they are able to serve a much greater proportion of the business population.

As a result, countries with strong cooperative and mutual banking sectors tend to have shallower recessions. In the 5 years after the global financial crisis, lending by German Sparkassen and cooperatives increased by 15% and 23% respectively. In Switzerland the increase through cantonal and cooperative banks was even higher, at 28% and 31% respectively. In the same period, total UK bank lending fell by 25%. ^{[footnote 52]}

The government would like to understand:

the extent to which the UK could learn from alternative banking models in other jurisdictions
what the barriers to establishing similar models in the UK might be

Community Development Finance Institutions (CDFIs) in the UK

CDFIs are small, regional, social impact sector lenders that provide debt finance and support to under-served smaller businesses that can find it difficult to access finance from mainstream lenders. Their emergence in the UK has been a positive development in the lending ecosystem.

CDFIs lend where traditional and the new challenger banks, and fintechs, cannot. They lend disproportionately more to under-served groups, such as businesses:

led by women
led by ethnic minority entrepreneurs
based in areas of higher deprivation

In 2023, 24% of CDFIs business lending went to ethnic minority-led businesses and 41% went to women-led businesses. ^{[footnote 53]} In 2023, 98% of SME loans were made outside London. ^{[footnote 54]}

In 2023 CDFIs supported 353 businesses to scale up and their lending to start-ups and SMEs reached the second highest level ever at £102 million. Since 2003, CDFIs have lent over £3.3 billion to nearly 850,000 customers. ^{[footnote 55]} This includes £1.1 billion of enterprise lending and £1.8 billion of social enterprise lending. ^{[footnote 56]} Most of the businesses which borrowed from them last year had previously been turned down by mainstream lenders.

Despite having been declined by traditional lenders, 9 out of 10 customers of CDFIs successfully repay their loans – and many go on to become future customer of banks as their businesses grow. CDFIs’ business customers typically benefit from borrowing at lower interest rates than other sources of finance available to them.

CDFIs require external support to run their operations either in the form of grants or concessionary capital. Historically, this has been provided by the UK government through projects such as the Regional Growth Fund or through EU programmes. The British Business Bank’s Community ENABLE Funding (CEF) programme aims to increase the availability of funding to social impact sector lenders, and the smaller businesses they serve in local communities across the UK’s nations and regions. The initiative, announced in November 2024, is expected to provide a significant boost to the sector, supporting up to £150 million of lending over the next 2 years.

There has been increasing support from banks for the CDFI sector.

Lloyds Bank is the lead investor in the £62 million Community Investment Enterprise Fund (CIEF), launched in March 2024, to help small businesses across England and Wales access finance to support local jobs and economic activity. ^{[footnote 57]}

As of November 2024, US bank JPMorgan Chase also supports a £4 million capacity building initiative to improve CDFIs’ operations and more efficiently deploy small business loans.

Question for businesses

15. Have you worked with a non-bank lender, such as a Community Development Finance Institution (CDFI), to secure finance? If so, what has been your experience?

Questions for general response

16. Do you believe there to be any barriers to the adoption of cooperative and mutual models by finance providers? If so, what are they?

How could these barriers be overcome?
What would greater adoption of these alternative models offer to businesses?

17. Are there alternative approaches in other jurisdictions that could address gaps and difficulties experienced by smaller businesses seeking finance in the UK? If so, please provide specific examples.

What are the characteristics of those approaches that make them distinct from the current UK model?

18. Should the government implement policy measures to stimulate more competition in provision of finance? If so, what could this include?

19. How can the CDFI sector be supported more effectively?

Question 9

Under-served entrepreneurs

Accepted Answer

Businesses led by women, ethnic minority and disabled entrepreneurs make a significant contribution to economic growth and provision of employment.

For example, women-owned and women-led businesses now contribute a total of £221 billion gross value added to the UK economy. ^{[footnote 58]} Ethnic minority-led businesses make a gross value added contribution of £25 billion per annum, equivalent to that of vital sectors like the chemical industry. ^{[footnote 59]} The contributions and success of these businesses could increase if they are better able to access the finance they need. New routes to finance can particularly benefit high-growth entrepreneurs from these groups.

Table: under-served entrepreneurs as a proportion of the UK business population

Under-served entrepreneur type	Proportion of the UK business population
Female	15%
Disabled	8%
Ethnic minority	7%

^{[footnote 60]}^,^{[footnote 61]}

Female and ethnic minority-led businesses and those led by disabled entrepreneurs face challenges in raising finance to start and grow their business. Businesses led by people with a disability, female or people from ethnic minority backgrounds are more likely to be younger or small businesses, or both younger and smaller, compared to their white and male-led counterparts. This makes accessing finance more difficult due to a shorter track record for credit applications, leading to higher interest rates and stricter loan terms. ^{[footnote 62]}^,^{[footnote 63]}

Over the past 10 years, these businesses have been more likely than other businesses to be discouraged from applying for finance, despite greater availability of finance options and providers in the market.

The main barriers for these groups are:

not knowing where to find the right finance
lower awareness of finance options
increased perceptions of rejection
lower confidence
cultural barriers

In addition to these groups, military veterans may encounter additional challenges in navigating the access to finance landscape upon transitioning from military to civilian life.

Data collection

Measurement of progress in this area is difficult and the data is of poor quality as entrepreneurs do not necessarily self-report these characteristics, or it is not collected by all lenders. Part of the unwillingness to collect this data is fear of increasing mistrust. This has led to important statistics – such as the total number of under-served businesses in the UK – being impossible to determine with precision.

While there are other approaches to collecting this data, such as inferential means, they are less reliable, leading to a use of both to help triangulate findings. Data collection and analysis is a particular challenge in relation to ethnicity and disability, as these are difficult to collect reliably without self-reporting. Gender and geography can be more accurately determined by the salutation and location recorded on external finance applications. This still underreports female-owned and led businesses, however.

The Alison Rose review of female entrepreneurship, commissioned by the government in 2019, shed light on the barriers faced by women starting and growing businesses and identified ways of unlocking this untapped talent. ^{[footnote 64]} As a result, we have a greater understanding, volume of data and level of detail on women’s entrepreneurship in comparison to other categories of under-served entrepreneurs which is evident in the content of this call for evidence.

Women’s entrepreneurship

The Alison Rose Review (2019) found that women entrepreneurs seeking finance are less likely than their male counterparts to take on debt finance, and typically ask for smaller amounts of money than male-led businesses (MLBs).

To improve access to finance, DBT works in partnership with industry to lead the Invest in Women Taskforce and the Investing in Women Code. The Invest in Women Taskforce’s mission is to make the UK the best place in the world to be a female founder. A priority of the Taskforce is to reduce the gender investment gap. On 25 November 2024, the Taskforce celebrated raising £255 million to be invested through female investors into women-led businesses (WLBs). The Taskforce’s Microfunding subcommittee seeks to improve access to finance for WLBs with options in grant funding and debt finance.

WLBs experience twice the rate of bank loan declines compared to other SMEs. ^{[footnote 65]} This leads to a cumulative effect when combined with the higher proportion of WLBs that do not try to access finance in the first place. The Investing in Women Code is an initiative for finance providers to support access to finance for WLBs. The Code started with 12 signatories in 2019, and now has over 270 – including most major UK retail banks.

The Code’s latest report found that, reassuringly, we continue to see very similar approval rates for application between genders (59% MLBs and 60% WLBs). ^{[footnote 66]} The report also found that the trend around lending extends to bank debt. WLBs continue to apply for lower value of debt at £104,000, while MLBs have nearly twice the value at £198,000. ^{[footnote 67]} While WLBs are disproportionately represented in sectors which tend to require lower levels of investment, this lower value likely reveals a lack of access to support, advice, confidence and networks. Intervention is required to boost investment, for example Code signatories (that have consistently reported data over 2020 to 2022) have increased their share of funding to women founders from 32% in 2020 to 38% in 2022. ^{[footnote 68]}

While the above initiatives are generating great momentum to increase access to finance for WLBs, family care responsibilities for female entrepreneurs continue to disproportionately affect their advancement. Business finance could work to accommodate these responsibilities, for example, Bank al Etihad’s ‘Shourouq’ Women Market Program, which creates female-friendly products, one of which makes it easier for women borrowers to take maternity leave by offering loan break payments during the leave period.

Ethnic minority entrepreneurs

Ethnic minority entrepreneurs are more willing to use finance to grow their business than most SMEs but are more likely to face barriers to applying. This suggests unmet demand for finance and is illustrated by ethnic minority-led businesses (EMBs) having been at least twice as likely as white-led businesses to report needing finance but not applying.

In the 18 months to Q2 2023, EMBs were as likely to be using traditional finance as SMEs overall, with 28% of all SMEs using one or more of the ‘core’ forms of finance (loans, overdrafts or credit cards), with EMBs in line (27%). ^{[footnote 69]}

In the 18 months to Q2 2023, EMBs were much more likely than other SMEs to have a long-term ambition to be a significantly bigger business (65%) and also more likely to be prepared to take risks to become more successful (73%). However, 38% of EMBs and 53% of Black SMEs thought it would be difficult for a business like theirs to get funding if they needed it. ^{[footnote 70]}

This suggests that a higher proportion of EMBs would be happy to use finance and want to grow their businesses, but due to the issues of discouragement and rates of rejection, actual proportion of EMBs using external finance is similar to all SMEs. A further consideration is that Muslim owned and led companies require access to Sharia compliant finance, which is not available from the majority of financial institutions.

Chart: Attitudes to finance

EMBs were more likely than SMEs overall to be an ‘Ambitious Risk Taker’, happier to use finance to grow but also slightly more concerned about being able to get finance.

Attitude	All SMEs	All EMBs
Happy to use finance	31%	44%
Difficult to get finance	32%	38%
Ambitious risk taker	27%	57%

Q96 Base: All SMEs Q1 2022 to Q3 2023, SME Finance Monitor – Ethnic Minority Businesses Report, UK Finance, BVA BDRC.

In 2021, 15% of EMBs reported having an application rejected over the past 10 years (4% for white-led businesses). ^{[footnote 71]} They were also more likely to have not been given a reason for rejection. ^{[footnote 72]} EMBs often lack business or personal collateral to support bank loan applications and may face barriers linked to a lack of credit history or a poor financial track record linked to creditworthiness. They face a decline rate of 2.5 times the average for SME. ^{[footnote 73]}

A lack of trust has been cited as a barrier to engagement with external finance providers, for reasons including perceived and actual discrimination, a belief that support providers do not understand EMBs specific needs, and prior negative experience of inappropriate support. ^{[footnote 74]}

To improve the lending outcomes for ethnic minority entrepreneurs, the Lending Standards Board (LSB) has announced that they are developing a code in partnership with customers and finance industry representatives. There is substantial support for a code of conduct that will focus on changing behaviour and improving education. It aims to reduce barriers and improve accessibility of products and services and ensure financial firms have greater awareness of the needs of different ethnic minority led businesses.

Disabled entrepreneurs

Disabled entrepreneurs account for 25% of small businesses but only 8.6% of total small business turnover. ^{[footnote 75]} Disabled founders face additional barriers to seeking and accessing external finance, including concerns that potential failure of entrepreneurship could be detrimental to their health if they risk all their financial security, given the need for a financial safety net to support fixed costs to manage their daily life. ^{[footnote 76]}

The Lilac Review was launched in February 2024 as an independent review aiming to deal with the inequality faced by businesses led by disabled people and level-up entrepreneurial opportunity across the UK. ^{[footnote 77]} The Disability Finance Code for Entrepreneurship, launched in December 2024, aims to boost access to finance for disabled entrepreneurs and encourage greater engagement between the financial services sector and the disabled entrepreneur community, with the aim to deal with inequality and could according to the Lilac Review, unlock £230 billion in untapped potential.

Deprived areas

Access to finance across the UK broadly reflects the geographical distribution of businesses and is therefore representative. However, there are some pressure-points, including in particularly deprived areas. For example, smaller businesses in deprived areas are more inclined to seek finance, but face more barriers to obtain it. ^{[footnote 78]}

Small businesses in deprived areas are more inclined to seek growth-oriented external finance (35%) than those in less deprived areas (32%). ^{[footnote 79]} However, they are also more likely to feel discouraged from applying (26% compared to 22%) and to show lower awareness of non-core finance options.

Before the pandemic, these businesses also had a higher rejection rate for finance applications (43% compared to 25%) compared to those from non-deprived areas. ^{[footnote 80]} In addition, deprived areas show a higher concentration of businesses with characteristics linked to increased barriers in accessing finance, such as having low credit balances, reporting a profit and being ethnic minority-led. ^{[footnote 81]}

At the regional level, based on applications made in 2023, the North West region saw the lowest success rates, with 69% of businesses ending up without a facility. This was closely followed by London, where 61% of applications did not have a successful outcome. ^{[footnote 82]}

Questions

For the questions in this section, we are particularly interested in responses from under-served entrepreneurs, specifically:

women entrepreneurs
disabled entrepreneurs
ethnic minority entrepreneurs
entrepreneurs in deprived areas

20. To what extent does the UK’s current lending environment meet the finance needs of under-served entrepreneurs?

21. What could encourage under-served entrepreneurs to apply for loans to support business growth?

22. Are there any other groups under-served in access to finance that should be considered beyond those discussed in this call for evidence?

23. What role could banks and other financial institutions play in improving access to finance for under-served groups through CDFIs?

24. In order better understand the lending outcomes of different groups, would you be willing to disclose information such as your gender, ethnicity and whether you have a disability to your lender?

25. Do you have experience of any initiatives, either government or private sector-led, that have been or could be beneficial for access to finance for entrepreneurs from under-served groups?

Question 10

Next steps

Accepted Answer

Through this call for evidence, we have set out and sought views on our interpretation of the evidence and our understanding of the debt finance landscape. Through analysis of the views shared, we will aim to better understand why demand for debt finance remains low, and how this can be improved.

In our response, we will consider whether there may be a further role for government to play in this area additional to the measures already taken or in development, to make progress towards overcoming barriers to small business access to finance, within the context of the wider business support ecosystem.

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Ministerial foreword

Context

Terminology

Table: defining an SME

How to respond

Why small business finance is important

Small business lending: progress and success

British Business Bank

Evaluations of British Business Bank schemes point to positive effects

Digital innovation and open banking

Demand for debt finance

Recent economic context

UK trends: debt finance

Use of finance

Risk aversion

Financial awareness and management approach

Questions for businesses

Questions for general response

Other developments in accessing finance

Personal guarantees

Lending implications for intangible assets

Regulation

Commercial Credit Data Sharing and the Bank Referral Scheme

Questions for businesses

Questions for general response

Alternative lending and business models

Approaches in other jurisdictions

Community Development Finance Institutions (CDFIs) in the UK

Question for businesses

Questions for general response

Under-served entrepreneurs

Table: under-served entrepreneurs as a proportion of the UK business population

Data collection

Women’s entrepreneurship

Ethnic minority entrepreneurs

Chart: Attitudes to finance

Disabled entrepreneurs

Deprived areas

Questions

Next steps

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